Markets seem to have calmed in the early going after a Tuesday selloff that hit the Industrials and Materials sectors, as well as crude oil and the small-cap Russell 2000. The heads of Treasury and the Fed enter day two of virtual testimony on Capitol Hill.
(Wednesday Market Open) Like spring weather, the stock market can be fickle. After yesterday’s blustery headwinds of coronavirus worry, this morning is pointing to a calmer day as stocks look to recover some ground.
It seems like some end-of-quarter rebalancing activity may be behind some of the volatility, but the undercurrent of stock repricing also may be continuing with investors alternating between stay-at-home stocks as the pandemic continues and reopening stocks when economic optimism rebounds.
There may be some of the latter going on this morning as a couple areas hit hardest yesterday seem to be on the mend. Crude oil futures—which got smashed yesterday, falling nearly $4 per barrel—are up 2.5% this morning, but still shy of the $60 mark they blew through Tuesday. Also, futures on the Russell 2000 Index (RUT)—which were hit particularly hard yesterday (see more below)—are leading the charge in the early going.
A bright spot this morning is coming from Intel (INTC), whose shares are up around 3.8% this morning after the chipmaker said it will build two new factories in Arizona. The move comes under a new chief executive who’s trying to return Intel to glory after manufacturing stumbles, the loss of important customers, and increased competition. More broadly, the new factories come at a time of a global chip shortage, but they won’t start production until 2024.
There may be some excitement in the broader market about the move as it’s a reminder of how well chip companies did last year. After falling last year, maybe the new plans can help Intel’s shares play catch up with competitors’ that soared last year.
One thing investors may be mulling over today is purchasing manager index data. A manufacturing PMI in Germany came in at a hefty 66.6 for the month, and manufacturing in France also topped consensus. But across the region, service PMI is still soft.
Yesterday’s one-year anniversary of the current bull market was marked by renewed worries about the coronavirus.
Comments on Monday from the World Health Organization that cases over the last week have been increasing in Europe, Southeast Asia, the Eastern Mediteranean and Western Pacific regions seemed to weigh on the market. Even though the Americas and Africa saw slight declines, Wall Street still seems concerned about the global economic recovery as a whole.
The rising number of cases even as more people get vaccinated doesn’t bode well for reopening economies. Much of France is back in lockdown, and Germany is extending restrictions. On this side of the pond New Jersey is pausing further reopening measures as case counts surge.
At the same time as the bad news on the case front, there have also been troubling developments on the vaccine front.
Yesterday, the United States said AstraZeneca (AZN) might have included outdated information in a trial, even though an announcement from the day before said that the vaccine was safe and highly effective in a large U.S. trial. AstraZeneca said it would share the most up-to-date efficacy data. Additionally, there have been concerns about the rollout of the Johnson & Johnson (JNJ) vaccine in the United States.
While virus-related worries seemed to be the main impetus for selling yesterday, it’s possible that investors were also worrying about whether there might be potential tax increases to pay for planned infrastructure projects in addition to pandemic stimulus measures.
With investors having a lot weighing on their minds about the pandemic, they seemed to be selling stocks that stand to do better as the economy improves. The Materials sector was the worst performing of the day, followed by Industrials, with farm and construction equipment maker Caterpillar (CAT) one of the biggest laggards in the Dow Jones Industrial Average ($DJI). Energy stocks also took it on the chin as oil prices dipped over worries that slow vaccine rollouts and lockdown restrictions in Europe will dent demand for crude. Also, airline stocks lost altitude and cruise line equities were low in the water.
The Russell 2000 (RUT) lost quite a bit more ground than the three main U.S. indices. Part of that may be some profit taking amid concerns that the small cap/value rally might have gotten over its skies. Plus, many of the small companies in the RUT stand to benefit from a reopening economy, so a risk-off day like Tuesday wasn’t super kind to them. Also, falling Treasury yields may have sent many of the regional banks in the index into negative territory.
With the re-opening stocks having such a bad day, the pendulum swung toward equities that have been doing well during lockdown periods as people have had to work, learn, and entertain themselves at home. Stay-at-home poster stocks Zoom (ZM) and Peloton (PTON) both rose more than 3.4%.
One reason that the market has been doing so well is that investors seem to have been pricing in a swift economic recovery. Any delay in that swiftness could hurt the market, as we saw yesterday with the concerns about the vaccine rollout and the rising case counts.
On a technical note for stocks, though the indices weakened throughout the day yesterday, it was nice to see the S&P 500 Index (SPX) bounce off 3900 and rally into the close. That momentum may be behind some of this morning’s gains, but we’ll have to see whether it continues.
CHART OF THE DAY: RISK OFF: With worries about vaccinations and rising case counts contributing to unease about the global economic recovery, riskier assets like oil (/CL—candlestick) retreated Tuesday. As an indicator of the market’s rising worry, the Cboe Volatility Index (VIX—purple line) rose back into the 20s. Data source: CME Group, Cboe Global Markets. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
The Dragon and the Eagle: In addition to resurgent worries about the coronavirus and concerns about inflation, there also seems to be an undercurrent of concern about U.S.-China relations that might also be weighing on the market. High-level talks in Alaska a few days ago signaled a chilly start to what some may be hoping could be a Biden-era reset in relations between the world’s two largest economies after the bruising trade war of the Trump administration. Tensions were on display regarding human rights abuse allegations, cyber attacks and pressure on Taiwan, and it’s not clear how the Biden administration will handle the Trump-era tariffs. Will the White House try to use their continuation as a stick or their removal as a carrot to gain progress on non-economic fronts? Whatever happens, the frosty talks in Alaska seem to have Wall Street on edge, especially when combined with another wave of COVID-19 and inflation worries.
Treasury, Fed Weigh in on Market Valuations: Even though the vaccine rollout has come with fits-and-starts, and the world continues to grapple with the pandemic, the stock market has recovered nicely relative to a year ago. As Wall Street has been outpacing Main Street, some investors seem to have gotten worried about high valuations, especially in big tech companies, but they also appear to have a fear of missing out on further gains. Those worried about the market getting toppy seemed to get some confirmation on Tuesday as Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell said in remarks before the House Financial Services Committee that some parts of the market are high.
Still, the financial leaders weren’t exactly sounding alarm bells. As Yellen put it, “I’d say that while asset valuations are elevated by historical metrics, there’s also belief that with vaccinations proceeding at a rapid pace, that the economy will be able to get back on track.” Powell reminded that the banking system remains well capitalized. The two continue their virtual visit to the Capitol today for joint testimony before the Senate Banking Committee.
Housing Affordability Under Pressure: As if there wasn’t enough dismal news for investors to wade through yesterday, housing data also disappointed. New home sales in February came in at a seasonally adjusted annual rate of 775,000 units, well under the 867,000 expected in a Briefing.com consensus. That’s on the heels of softer-than-forecast February existing home sales data on Monday. It seems that new home sales in the Midwest and South took a hit from severe winter weather during February. But as Briefing.com points out, a marked drop in month-on-month new home sales in the West coupled with a higher proportion of new homes sold for $399,999 or less indicate “increased affordability pressures being applied by high prices and rising mortgage rates.” A similar situation is facing the existing homes market, where supply is near all-time lows and prices have been rising faster than income gains. That’s creating a situation that Briefing.com says is going to pressure affordability from a price standpoint even as mortgage rates rise.
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